Korean overdraft debt grows 4.5 times faster on Kospi crash days than rally days

Korean banks offer a kind of loan called a minus account. It works like a line of credit attached to a normal bank account, so a person can borrow money any time up to a set limit and pay it back whenever they want. A new report from Seoul Economic Daily found something worth paying attention to in how Korean investors are using these accounts lately. On days Kospi falls, the amount borrowed through minus accounts grows much faster than on days Kospi rises.

The 4.5 times difference

The newspaper looked at daily minus account balances at five of Korea's biggest banks, KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup, over June and July. On days Kospi fell, the combined balance grew by about 101.4 billion won (about $67.6 million) a day on average. On days Kospi rose, it grew by about 22.3 billion won (about $14.9 million) a day. That is 4.5 times more borrowing on the down days than the up days.

The worst days made it worse

The pattern got stronger on Kospi's roughest days. On the four trading days this summer when Kospi fell more than 7%, minus account balances grew about 448.3 billion won (about $299 million) a day on average, well past the regular down day pace. On June 23, when Kospi fell 9.99%, the five banks saw balances rise 405.7 billion won (about $270.5 million) in a single day. The next day added 415.8 billion won (about $277.2 million) more, so the two days together came to 821.5 billion won (about $547.7 million). On July 13, when Kospi fell 8.95%, balances grew 580.9 billion won (about $387.3 million). On June 8, when Kospi fell 8.29%, they grew 471.9 billion won (about $314.6 million).

A more than three-year high, and still growing

The five banks' combined minus account balance reached 44.13 trillion won (about $29.4 billion) as of July 20. That is up 4.46 trillion won (about $3.0 billion) from 39.67 trillion won (about $26.4 billion) at the end of April, in under three months. Korean financial media describe the current level as the highest in more than three years. The growth is also adding pressure to how much banks can lend overall this year under household loan targets set with regulators.

Why investors are doing this

A bank official told the newspaper the borrowing likely comes from two places. Some of it is people wanting extra cash to buy more stock right after a drop. Some of it is derivatives investors pulling together short term money fast to cover a margin call, which is when a broker demands more collateral after a losing trade. A card company official added that card loan balances have shown a similar pattern, growing every time Kospi has a bad day recently.

What this fits into

This is a slower, steadier version of a pattern this site has already covered, Korean retail investors treating a stock market crash as a buying chance, often using borrowed money to do it. It echoes what happened with single stock leverage ETFs earlier this year, where regulators stepped in because so much borrowed money was chasing volatile stocks. A minus account does not move nearly as fast as a leveraged ETF, but the size of the numbers involved, hundreds of billions of won on a single bad day, shows how much Korean households are willing to borrow when they see a dip as a chance to buy.

Sources

• Seoul Economic Daily (Korean language): on the day Kospi fell 9%, bank minus accounts grew 580 billion won, July 22
• Our earlier coverage: Korea's leverage ETF crackdown and Kospi's worst one-month drop among 46 economies

Figures are from South Korean bank reporting as described above, converted to US dollars at about 1,500 won to the dollar. This is general information about market conditions, not investment advice.